Nudging a Huge Beer Deal Down a Long Road

By Steven Davidoff Solomon

Oct. 7, 2015

Call it the hostile “nudge.”

Anheuser-Busch InBev’s $104 billion offer to acquire SABMiller is all about trying to nudge SABMiller into accepting the deal without Anheuser-Busch InBev having to go into full-fledged hostile bid mode.

The news release on Wednesday merely stated that Anheuser-Busch InBev was disclosing an offer that it had made to SABMiller, but it did not take the next step of formally starting an exchange offer to SABMiller shareholders, which is the final step that bidders take when they make a hostile bid.

This is why if you read this now public offer, known as a teddy bear-hug letter, it is littered with phrases like “we have the highest respect for SABMiller” and that this offer is “an extremely compelling opportunity” for SABMiller shareholders.

The reason is twofold. First, it is always nice to avoid a full-fledged hostile takeover, and this language is often included in the first communications of a bidder. The tone is “let’s all try to be friends” (that’s the teddy bear), with the threat of a hostile bid looming (the bear).

More important, the two companies are the two largest brewers in the world, with more than a 40 percent worldwide market share and 70 percent of the United States market. Anheuser-Busch InBev is going to face rigorous antitrust review of this transaction in scores of countries, and it will no doubt have to sell some brands. Deals will need to be cut and the market for beer globally remade.

To engage in a hostile deal while trying to win over regulators will make Anheuser-Busch InBev’s life much more difficult. Instead of being an ally, SABMiller could instead go to regulators to complain about the offer and argue that it violates antitrust law.

Under British rules, SABMiller is barred from adopting takeover defenses, such as a poison pill. So its defense would largely consist of this antitrust, rear-guard action. SABMiller could even make assertions to regulators that this deal could not obtain antitrust approval, something that would bar it from ever accepting an Anheuser-Busch InBev bid.

In part, this is why Anheuser-Busch InBev has also gone to great lengths to win over SABMiller’s largest shareholder, Altria, which owns 27 percent of SABMiller, by offering a cash-and-stock alternative. This alternative pays a lower price than the pure cash offer, but it gives Altria the chance to keep ownership of the combined group. For Anheuser-Busch InBev, this is also cheap financing because the shares cannot be sold for five years.

The next step is in SABMiller’s court. With its largest shareholder raising the pressure, SABMiller is no doubt feeling cornered. Nonetheless, it knows that this deal is unlike most other hostile takeovers in Britain – SAB Miller actually has a defense, namely the antitrust card. So it may try to slow things down to buy valuable time.

In any event, under British rules, Anheuser-Busch InBev will be required to put a formal offer on the table within 28 days or walk away. Any formal offer from Anheuser-Busch InBev will be conditioned on antitrust approvals, meaning that these will have to come first. It is conceivable that these approvals could take up to a year, if they ever come.

This deal has a long way to go, including getting a buy-in from SABMiller. The question is whether the nudge works.

Steven Davidoff Solomon is a professor of law at the University of California, Berkeley. His columns can be found at nytimes.com/dealbook. Follow@stevendavidoff on Twitter.